Mutations in presenilin genes account for the majority of the cases of the familial form of Alzheimer's disease (FAD). Presenilin is essential for gamma-secretase activity, a proteolytic activity involved in intramembrane cleavage of Notch and beta-amyloid precursor protein (betaAPP). Cleavage of betaAPP by FAD mutant presenilin results in the overproduction of highly amyloidogenic amyloid beta42 peptides. gamma-Secretase activity requires the formation of a stable, high-molecular-mass protein complex that, in addition to the endoproteolysed fragmented form of presenilin, contains essential cofactors including nicastrin, APH-1 (refs 15-18) and PEN-2 (refs 16, 19). However, the role of each protein in complex formation and the generation of enzymatic activity is unclear. Here we show that Drosophila APH-1 (Aph-1) increases the stability of Drosophila presenilin (Psn) holoprotein in the complex. Depletion of PEN-2 by RNA interference prevents endoproteolysis of presenilin and promotes stabilization of the holoprotein in both Drosophila and mammalian cells, including primary neurons. Co-expression of Drosophila Pen-2 with Aph-1 and nicastrin increases the formation of Psn fragments as well as gamma-secretase activity. Thus, APH-1 stabilizes the presenilin holoprotein in the complex, whereas PEN-2 is required for endoproteolytic processing of presenilin and conferring gamma-secretase activity to the complex.